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Nonspouse Rollover and 5 year rule


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#1 Retirement4Life

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Posted 05 September 2007 - 01:34 PM

The plan has elected the 5 year rule. Notice 2007-7 contradicts itself or isn't all that clear on this subject. In Q-17 (b) it states that if the 5 year rule applies then the non-spouse bene can roll the amount to an IRA within the first 4 years. After end of 4th year it would need to be distributed in full by end of 5th year. In item (2) within the same Q-17 it states there is a special rule wherein the non-spouse can elect the life expectancy rule if they elect the rollover by the end of the year following the year of death, and the IRA also must use the same beneficiary for life expectancy calculation.

Then in Q-19 it states that if a non-spouse bene rolls the proceeds, and if the 5 year rule was in effect under the Plan, then the the minimum distributions in the IRA are determined using the same 5 year method. So, following that language, the non-spouse would have to distribute the full amount from the IRA within 5 years, correct? And is that 5 years from death? Or 5 years from the rollover?

Looking at both of these Q & A sections it seems like if the 5 year rule is in effect then it is always in effect regardless if the non-spouse does the rollover in year 2 or year 4? Or am I missing something? Bottom line can the non-spouse elect the life expectancy method as long as they do the rollover by the end of the year following the year of death?

#2 J Simmons

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Posted 05 September 2007 - 03:13 PM

The non-spouse may elect the life expectancy method as long as they do the rollover to the IRA and take the first life-expectancy annual payment by the end of the year following the year of death.

What the Notice is trying to explain is that if the benefits remain in the employer's plan passed the end of the year following the year of death and annual life expectancy payouts have not begun by the end of the year following the year of death, then all benefits will have to be distributed out (and taxable income) by the end of the fifth year after the year of death. This is so even if in the meantime there's been a rollover to an IRA; is so, the distribution by the end of the 5th year following the year of death is from the IRA.

On the other hand, if life expectancy payments have timely begun out of the employer's plan, then the balance of the benefits can be rolled to an IRA and the annual life expectancy payments continued out of the IRA. For the year that the rollover takes place, the minimum required distribution for that plan year needs to be made from the employer's plan and not from the IRA after the rollover is accomplished.

Edited by J Simmons, 05 September 2007 - 03:21 PM.

John Simmons
jsimmons@ida.net


Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

#3 Retirement4Life

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Posted 05 September 2007 - 03:20 PM

That makes sense and clears it up. Thanks.